Recordkeeping tips from the pros

If you want to give your tax recordkeeping skills a performance boost, do what accounting professionals do.

1. Maintain a separate bank account for all self-employed business activity. This will greatly minimize confusion come tax time by giving you just one place to look for business transactions. The same is true for credit cards; have a card used solely for business and another for personal purchases.

2. Reconcile your bank statements. Though tedious, it is the only way to know for sure if you've included everything in your records.

3. Take advantage of technology. There are many software applications available for organizing tax records, and digitizing your records can also save office filing space.

4. Track your finances by important tax categories. Knowing how to classify your expenses and income is half the battle. Look at your last tax return or accountant's tax organizer for clues. Individuals should focus on itemized deductions and tax credit categories; business owners should look at Schedule C line items.

5. Be diligent and consistent. Make recordkeeping a year-round task, not a year-end burden. For instance, update business mileage records daily. File away receipts before they are lost. Record tax transactions as they occur throughout the year.

6. Watch for important receipts. You probably already know you should collect the standard items: W-2s, 1099s, and annual mortgage statements. But did you know that charitable donations of $250 or more must be substantiated by a receipt from the charity to be deductible? Also, keep all pay stubs and brokerage statements. They might contain hidden deductions.

7. Hold on to prior-year tax records. Because an IRS audit is always a possibility, keep copies of tax returns and supporting records for seven years.

8. Be aware of special tax breaks. Some records become important as tax rules change. For instance, business owners should be careful to maintain records on major equipment purchases to qualify for enhanced expensing perks. Homeowners need to keep supporting documents for energy-efficient purchases.

9. Keep your tax advisor abreast of major life changes. New happenings in your life, like a job change, new child, or change in marital status might affect how you track your income and expenses. A quick call to your tax pro will help you stay on top of things.

Have you considered a SIMPLE plan for your business?

Many sole proprietors and small business owners agree on the following two issues: they pay too much in taxes and they have difficulty attracting and retaining good employees. One way to address both of these issues is to have your business sponsor a retirement savings plan. If you're self-employed or own a small business and don't currently have a retirement plan in place, consider setting up a SIMPLE plan.

SIMPLEs (Savings Incentive Match Plans for Employees) are available in two forms - SIMPLE IRAs and SIMPLE 401(k)s. SIMPLE plans are generally available only to small businesses that don't maintain any other retirement plan. If your business has more than 100 employees, you won't be eligible for a SIMPLE.

Most businesses will find the IRA version preferable to the 401(k) form of SIMPLE. Here's how SIMPLE IRAs work. Eligible employees (including yourself) can elect to have a portion of their earnings withheld each pay period, limited to $11,500 in annual deferrals ($14,000 for those aged 50 or older). The employees then direct how the deferrals will be invested within their own SIMPLE IRAs. Amounts withheld for the SIMPLE IRA reduce the employee's taxable income and grow tax-deferred.

The costs to set up and administer a SIMPLE IRA are minimal. However, as the employer, you're required to make contributions into your employees' SIMPLE IRAs on their behalf. You have the option of contributing either 2% of the wages of every eligible employee or making matching contributions up to 3% of the wages of those employees who participate in the plan.

Generally, the deadline for businesses to establish a SIMPLE plan for 2012 is October 1, 2012. To find out more about SIMPLE plans, give us a call.

Investment Tax Tip

Consider tax-exempt investments as a means of cutting your income tax. There is an easy way to compare the yield on tax-exempt investments (such as municipal bonds) with the after-tax yield from taxable investments. Subtract your top tax bracket from 100 and divide the tax-exempt interest rate by that number. The result is the equivalent taxable return.

Retirement Tax Tip

Consider a Roth IRA if you qualify for one. The beauty of a Roth is that your investment grows tax-free, and qualified withdrawals from a Roth will be completely tax-free. Contact our office for more information.

Should a freshman in college have a credit card?

Should you send your child off to college with a credit card? Opinions are divided, both among parents and financial advisors. It's a situation that can work out really well or really badly, depending on the student and the parents.

At its best, everyone benefits from giving a student a card. The student uses the card for budgeted expenses, pays off the balance each month, and starts building a good credit history. The parents sleep better knowing the student has a credit source in case of emergencies.

At its worst, the student is unused to managing money or living within a budget. The student fails to make payments on time, incurs high interest charges, and ruins his or her credit history. The parents have to step in to bail the student out.

Among the risks:

* Lack of experience in managing money can lead a student to overspend or to neglect making payments on time.

* Peer pressure may encourage a student to spend on entertainment or clothes, just to keep up with friends.

* Failure to agree on a budget beforehand can result in shock when you see your student's monthly statement.

* Parents co-signing for the card can put their credit scores at risk, too.

* Loss or theft of the card can lead to problems that take time to resolve.

To minimize risks:

* Set ground rules for use of the card. Agree on what it may and may not be used for. Put the agreement in writing and have the student sign off.

* Establish a budget. Talk regularly about how your student is managing his or her expenses within the budget.

* Consider alternatives to a credit card, at least for the freshman year. Consider using a prepaid credit card, or set up a checking account with a debit card. That allows the student to gain experience managing expenses within a budget.

Finally, remember you may have no say in the matter. Students are bombarded with credit card offers as soon as they enroll. Card companies are usually happy to issue a card to any student over age 18 in his or her own name.